Macquarie buyback after plunge

Macquarie Group
has lowered its full-year earnings guidance and delivered its worst ever return on equity during a half year in which it cut more than 400 local jobs.

Despite the gloom, the financial conglomerate plans to undertake an $800 million share buyback, appeasing investors who called for the capital management strategy.

The poor financial results for the six months to September 30, which were slightly below analysts’ consensus estimates, mirrored those of Macquarie’s Wall Street peers, with capital markets activity at its lowest level in a decade.

While global markets rebounded in reaction to Europe’s plan announced on Thursday to shore up Greece’s sovereign debt and the continent’s banks, chief executive
Nicholas Moore
was cautious about any near-term upside for Macquarie.

Its three market-facing businesses – securities, investment banking and fixed income – went backwards in the first six months of the bank’s financial year, leading to a 24 per cent fall in profit to $305 million compared to the same period last year.

Mr Moore said if market conditions remain unchanged for the second half of the bank’s year to March 31, 2012, he expected full- year profit to be below last year’s $956 million. If markets recover, the result should be in line with 2011 full year result.

Mr Moore said dividend yields and bond yields had recently crossed over – historically a promising sign for markets.

“There are some reasons to be both nervous and have a greater degree of confidence," he said.

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The group’s worldwide head count fell from 15,556 in March to 15,088 in September. In Australia, 447 jobs or 6 per cent of its workforce were cut over six months, mainly in the market-exposed businesses.

Macquarie has also amalgamated some of its back office, technology and trading room functions, and Mr Moore said expense control was an ongoing task.

“We take these initiatives on a business-by-business basis, and we try to make sure the businesses are lining up to the opportunities in the marketplace," he said.

Return on equity was an ultra low 5.7 per cent for the half – below the group’s cost of capital and only a fraction of the 28 per cent recorded during the boom years before the credit crisis struck in 2008.

The low return on equity means Macquarie bankers will receive minimal bonuses this year, unless the board adjusts their compensation. Despite the poor results Mr Moore said there was surplus capital to buy back up to 10 per cent of the ordinary shares before new prudential capital rules begin in 2013.

Investors reacted positively to the buyback. Macquarie’s shares finished up more than 3 per cent on Friday in a market that closed flat.

“It makes sense to buy back stock at a big discount to book value rather than pay unfranked dividends," Tyndall Investment Management’s Brad Potter said.

The buyback will be partly funded by a potential hybrid securities issue of at least $400 million, which will lower the bank’s cost of capital.

The other bright spot was the annuity-style business, particularly funds management and corporate and asset finance, which are less exposed to markets. Both posted double-digit growth.

The full-year guidance is predicated on receiving a special capital return in the second half from the owner of Sydney airport, MAp, in which Macquarie owns 22 per cent. Mr Ward said its share of the capital return would be about $300 million, or $150 million after allowing for tax and an allocation to the bank’s profit share pool.

ATI Asset Management head of research David Liu said: “The result is showing weakness in the securities and FICC [fixed income, currencies and commodities] businesses."

“The catalysts from here need to be corporate and M&A activity, and at this stage there’s no evidence of a pickup in that."